Shari‘a Compliant Securities: what do you need to know?

The Law of Sukuk: Shari‘a Compliant Securities: what do you need to know?

What follows is an unedited version of a blog post to appear on Thomson Reuters’ subscription service Legal Solutions UK.

How does secondary trading of sukuk differ to that of bonds?

Secondary trading of sukuk is more limited as compared to the secondary trading of bonds. There are two reasons for this. First, on a global basis sukuk investors have shown a weaker inclination to sell in secondary markets and a marked tendency to buy and hold until maturity. The motivations behind this trend are complex and varied; some investors share a conservative, more risk averse attitude. Others seek sukuk as a means of portfolio diversification and are reluctant to sell an asset in an asset class that the relatively small global sukuk market (certainly by comparison with the bond market) may make it difficult or impossible to replace at will. As sukuk have become more mainstream and sukuk holders more diverse (as subscriber statistics show) this tendency cannot be explained solely with reference to religious sensibilities. A further element in the equation is that the tendency among some sukuk investors and the resulting market perceptions of sukuk as already set out have become a self-fulfilling prophecy: the sukuk secondary market has not developed to a point where investors can rely on it, so they do not, which reinforces the phenomenon.

The second reason is Islamic legal compliance. Islamic commercial law declares trading